The Nugget

What is Net Present Value (NPV)?

Written by Prospector | Jan 18, 2023 12:00:00 PM

Jargon in the mining industry can be confusing, especially when it comes to the investment side of things! One key decision point of whether or not to invest in a mining company or project is determining the Net Present Value, or NPV. But, what does that mean, and how can it affect your investment decisions?

NPV 101

NPV is the widely accepted tool for measuring the value of a mine project. It calculates the current value of the cash flows at the required rate of return of a project compared to the initial investment. By looking at the money you expect to make from an investment and converting the returns into today’s dollars, you can decide whether the project is potentially worthwhile

NPV is accepted for two major reasons- it considers the time value of money, and provides a concrete number that managers can use to easily compare an initial outlay of cash against the present value of the return. The calculation takes the sum of the present value of cash flows, both positive and negative, for each year associated with the investment, and discounted so that it’s expressed in today’s dollars.

NPV = Net Present Value, R(t)= Net cash flow at time t, i = discount rate, t= timeof cash flow

How is NPV different from IRR?

Another term people often use and see is the Internal Rate of Return, or IRR. This is a calculation used to estimate the profitability of potential investments. IRR estimates the profitability potential using a percentage value rather than a dollar amount. Another explanation is that it’s the discount rate that makes the NPV of all cash inflows of a project equal to zero. Below are a few basic differences between NPV and IRR.

  • NPV is expressed as a form of currency return, IRR is expressed as a percentage return
  • NPV is an absolute measure that represents the value of currency, IRR is a relative measure that is a rate of return
  • NPV can be used to evaluate projects where there are changes in cash flows, IRR cannot be used in that case
  • NPV is often better understood by the general public since it can be easier to grasp, IRR is used more by business managers
  • If a discount rate changes, the NPV produces different results for the same project where IRR would produce the same result

Both NPV and IRR calculations have advantages and disadvantages to their uses. NPV is most commonly used for mining investments since it has an outcome of a dollar amount, and if the NPV is greater than zero it’s generally considered to be financially worthwhile.

Prospector Makes It Easy

You don't have to be a math genius or spend hours calculating NPVs with Prospector! With our built-in NPV Calculator, we have made it easy for users to calculate the NPV, flex inputs, and even save or print information. It's easy to save time while making an informed decision about your investment! 

Want to learn more? Watch this short video to learn more about using the built-in NPV calculator on Prospector!

 

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